Bank Stock Return Sensitivities to the Long-Term and Short-Term Interest Rates: A Multivariate GARCH Approach

Managerial Finance; 2004; 30, 9; p.32-55

Fox School of Business Research Paper

24 Pages Posted: 17 Jun 2014

See all articles by Elyas Elyasiani

Elyas Elyasiani

Temple University - Department of Finance

Iqbal Mansur

Widener University - School of Business Administration

Date Written: 2004

Abstract

This study employs a multivariate GARCH model to investigate the relative sensitivities of the first and the second moment of bank stock return distribution to the short-term and long-term interest rates and their respective volatilities. Three portfolios are formed representing the money center banks, large banks, and small banks, respectively. Estimation and testing of hypothesis are carried out for each of the three portfolios separately. The sample includes daily data over the 1988-2000 period. Several hypotheses of: i) insensitivity of bank stock return to the changes in the short-term and long-term interest rates, ii) insensitivity of bank stock returns to the changes in the volatilities of short-term and long-term interest rates, and iii) insensitivity of bank stock return volatility to the changes in the short-term and long-term interest rate volatilities. The findings indicate that short-term and long-term interest rates and their volatilities do exert significant and differential impacts on the return generation process of the three bank portfolios. The magnitudes and the direction of the effect are model-specific namely that they depend on whether the short-term or the long-term interest rate level is included in the mean return equation. These findings have implications on bank hedging strategies against the interest rate risk, regulatory decisions concerning risk-based capital requirement, and investor's choice of a portfolio mix.

Suggested Citation

Elyasiani, Elyas and Mansur, Iqbal, Bank Stock Return Sensitivities to the Long-Term and Short-Term Interest Rates: A Multivariate GARCH Approach (2004). Managerial Finance; 2004; 30, 9; p.32-55; Fox School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=2451164

Elyas Elyasiani (Contact Author)

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-5881 (Phone)
215-204-5698 (Fax)

Iqbal Mansur

Widener University - School of Business Administration ( email )

3800 Vartan Way
PO Box 69381
Harrisburg, PA 17106-9381
United States

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